CAIA - 30 - Volatility, Correlation, and Dispersion Products Flashcards Preview

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Flashcards in CAIA - 30 - Volatility, Correlation, and Dispersion Products Deck (72)
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1

___ ___are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

Volatility derivatives are pure plays on volatility with returns that are driven directly by exposure to the volatility factor.

2

Investments that tend to decline with increases in return volatility are said to be ___ volatility and have a ___risk premium.

Investments that tend to decline with increases in return volatility are said to be short volatility and have a positive risk premium.

3

Studies show that volatility ___ a unique risk factor.

Studies show that volatility is a unique risk factor.

4

An options ___ is the length of time until the contract expires

An options tenor is the length of time until the contract expires

5

The time decay of options decreases at the ___ ___of ___.

The time decay of options decreases at the square root of time.

6

A ___ ___ combines a short call and a short put on the same asset with the same strike price.

short straddle combines a short call and a short put on the same asset with the same strike price.

7

A ___ ___combines a short call and a short put on the same asset, with different strikes.

short strangle combines a short call and a short put on the same asset, with different strikes.

8

At-the-money straddles have ___ market beta.

At-the-money straddles have zero market beta.

9

A short ___ ___ involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

A short iron condor involves selling an out-of-the-money bull spread and an out-of-the money bear spread.

10

A short ___ ___ involves selling a bull spread and a bear spread with the same middle strike price.

A short iron butterfly involves selling a bull spread and a bear spread with the same middle strike price.

11

___ reflects the effects of declines in return volatility of the underlying asset and ___directly reflects the passage of time. These two measures are ___ correlated.

Vega reflects the effects of declines in return volatility of the underlying asset and theta directly reflects the passage of time. These two measures are highly correlated.

12

Options with higher vega have ___ gammas and ___thetas. An option with higher vega decays ___each day than one with lower.

Options with higher vega have lower gammas and higher thetas. An option with higher vega decays more each day than one with lower.

13

___ risk can be reduced by hedging a call position with a short position in the underlying asset.

Delta risk can be reduced by hedging a call position with a short position in the underlying asset.

14

___-neutral hedged option positions are a play on the volatility of the option's underlying asset.

Delta-neutral hedged option positions are a play on the volatility of the option's underlying asset.

15

Delta-neutral portfolios that are long options are ___ gamma.

Delta-neutral portfolios that are long options are long gamma.

16

To keep a long gamma portfolio hedged, traders ___ as the stock price falls and ___as it rises.

To keep a long gamma portfolio hedged, traders buy as the stock price falls and sell as it rises.

17

If realized volatility exceeds the initial vega, then positive effects of long ___ dominate the effects of ___and the position experiences a ___.

If realized volatility exceeds the initial vega, then positive effects of long gamma dominate the effects of theta and the position experiences a gain.

18

Infrequent rebalancing is a bet that volatility will be ___.

Infrequent rebalancing is a bet that volatility will be directional.

19

Realized volatility ___-___, ___and has a ___ ___.

Realized volatility mean-revertsclusters and has a long memory.

20

Volatility is often modeled using ___ ___ ___ ___ and ___ ___ models.

Volatility is often modeled using generalized autoregressive conditional heteroscedasticity (GARCH) and regime switching models.

21

An ___ ___ ___ represents several vegas relative to their tenor, moneyness or type.

An implied volatility structure represents several vegas relative to their tenor, moneyness or type.

22

A vega structure that focuses on the relationship between vegas and moneyness is a ___ ___.

A vega structure that focuses on the relationship between vegas and moneyness is a volatility skew.

23

An option's ___ ___ is a graphical representation of vega for several options with different expiration dates and strike prices.

An option's volatility surface is a graphical representation of vega for several options with different expiration dates and strike prices.

24

Volatility strategies have recovered from drawdowns in less than ___ year, which contrasts with long-only stocks, credit, or commodity investments that can take ___-___ years.

Volatility strategies have recovered from drawdowns in less than 1 year, which contrasts with long-only stocks, credit, or commodity investments that can take 1-2 years.

25

Mean reversion in realized volatility (is/is not) aribtragable.

Mean reversion in realized volatility is not aribtragable.

26

A ___ ___is a process that is used to model values that may experience large discrete changes.

jump process is a process that is used to model values that may experience large discrete changes.

27

___ ___is the risk of continuous accrual of small changes in an asset's volatility over time.

Volatility diffusion is the risk of continuous accrual of small changes in an asset's volatility over time.

28

A ___ ___refers to the risk of large, sudden increases in voalitility.

volatility jump refers to the risk of large, sudden increases in voalitility.

29

Continuous time diffusion process for returns (equation)

30

A ___ ___occurs when the observed behavior of a financial series undergoes a significant change.

regime change occurs when the observed behavior of a financial series undergoes a significant change.

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